Introduction to Income Taxation Citizens of the Philippines

- Under Sec. 1, Article IV of the Philippine

The Concept of Income
Constitution, the following are citizens of the
Philippines:
Why is Income Subject to Tax?
1. Those who are citizens of the Philippines at
- Income is regarded as the best measure of
the time of the adoption of the 1987
taxpayers’ ability to pay tax. It is an excellent
Philippine Constitution;
object of taxation in the allocation of government
2. Those whose fathers or mothers are citizens
cost.
of the Philippines;
- The tax concept of income is simply referred to as
3. Those born before January 17, 1973, of
"gross income" under the NIRC.
Filipino mothers, who elect Philippine
- A taxable item of income is referred to as an
citizenship upon reaching the age of majority;
"item of gross income" or "inclusion in gross
4. Those who are naturalized in accordance with
income".
law.
- Gross income simply means taxable income in
layman's term. Under the NIRC however, the term
Nonresident Citizen (NRC) of the Philippines
"taxable income" refers to certain items of gross
- Sec. 22(E) of the NIRC describes a nonresident
income less deductions and personal exemptions
citizen as a citizen who:
allowable by law. Technically, gross income is
1. Establishes, to the satisfaction of the
broader to pertain to any income that can be
Commissioner of Internal Revenue, the fact of
subjected to income tax.
his physical presence abroad with a definite
- Gross income is broadly defined as any inflow of
intention to reside therein;
wealth to the taxpayer from whatever source,
2. Leaves the Philippines during the taxable year
legal or illegal, that increases net worth. It
to reside abroad
includes income from employment, trade,
• As an immigrant; or
business or exercise of profession, income from
• For employment on a permanent basis; or
properties, and other sources such as dealings in
• For work and derives income from abroad
properties and other regular or casual
and whose employment thereat requires
transactions.
him to be physically abroad most of the
time during the taxable year.
Income Tax for Individuals
3. A citizen of the Philippines who shall have
- Individual Taxpayers are natural persons with
stayed outside the Philippines for one
income derived from within the territorial
hundred eighty-three days (183) or more by
jurisdiction of a taxing authority. Under RA 8424,
the end of the year (aggregate).
otherwise known as the National Internal
- A non-resident citizen who arrives in the
Revenue Code (NIRC), also known as the Tax
Philippines at any time during the taxable year to
Code, as amended, individual taxpayers are
reside permanently in the Philippines shall be
classified as follows:
considered a nonresident citizen for the taxable
1. Resident citizens (RC)
year in which he arrives in the Philippines with
2. Nonresident citizens (NRC)
respect to income derived from sources abroad
3. Resident aliens (RA)
until the date of his arrival in the Philippines
4. Nonresident aliens (NRA)
[Section 22(E)(4) NIRC].
 Engaged in Trade (NRAET)
 Nonresident aliens not engaged in a
 Illustration 1
Trade or Business (NRANET)
- Pedro, an OFW, returned in the Philippines for
 Alien individuals employed by
good on May 2021.
POGOs and/or OGLs
- He shall be classified for 2021 taxable year as
follows:
• January to April 2021 - nonresident citizen
• From May 2021 onwards - resident citizen
NOTE: For taxation purposes, Individual Taxpayers are
only allowed to use calendar year period.
 Illustration 2 Resident aliens
- Ana, a resident citizen, left the Philippines on July - Section 22(F) of the Tax Code defines resident
1, 2021 to reside permanently in U.S. together alien as an individual whose residence is within
with her family. She shall be classified for 2021 the Philippines and who is not a citizen thereof.
taxable year as follows: Aliens who are actually present in the Philippines
• January to June 2021 - resident citizen and who are not mere transients or sojourners are
• From July 2021 onwards - nonresident citizen classified as resident aliens. An alien who lives in
the Philippines with no definite intention as to his
Overseas Contract Workers (OCW) Overseas Filipino stay is also a resident alien. Likewise, an alien who
Workers (OFW) comes to the Philippines for the purpose that
- Revenue Regulation 1-2011 defines OCWs as requires extended stay for its accomplishment, so
Filipino citizens employed in foreign countries, he makes his home temporarily in the Philippines,
commonly referred to as OFWs, who are physically is a resident, regardless of his intention to return
present in a foreign country as a consequence of to his residence abroad.
their employment thereat. Their salaries and Non-resident aliens
wages are paid by an employer abroad and are - The term "nonresident alien' under Section 22(G)
not borne by entities or persons in the Philippines. of the Tax. Code means an individual whose
Hence, OFWs are classified as nonresident residence is not in the Philippines and who is not a
citizens for tax purposes. To be considered as an citizen thereof. They are aliens who come to the
OCW or OFW, they must be duly registered as Philippines for a definite purpose, which in its
such with the Philippine Overseas Employment nature may be promptly accomplished. They are
Administration (POEA) with a valid Overseas alien who are mere transients or non-residents,
Employment Certificate (OEC). hence, classified as nonresident alien.
- Seafarers or seamen are Filipino citizens who - Aliens who stayed in the Philippines for an
receive compensation for services rendered aggregate period of more than 180 days during
abroad as a member of the complement of a the taxable year and/or aliens who have business
vessel engaged exclusively for international trade. income in the Philippines are considered as
To be considered as an OCW or OFW, they must nonresident aliens engaged in trade or business
be duly registered as such with the Philippine (NRAET). Under Section 22(S) of the Tax Code,
Overseas Employment Administration (POEA) with "Trade or Business“ include performance of the
a valid Overseas Employment Certificate (OEC) functions of a public office or performance of
with Seafarers Identification Record Book (SIRB) or personal services in the Philippines (except
Seaman's Book issued by the Maritime Industry performance of services by the taxpayer as an
Authority (MARINA). employee). If an alien stays in the Philippines for
- For income taxation purposes, OCWs/OFWs are only 180 days or less, or he is not deriving
classified as nonresident citizens. business income in the Philippines, he is
considered as a nonresident alien not engaged in
Resident citizen of the Philippines (RC) trade or business.
- A Filipino citizen taxpayer not classified as - A nonresident alien not engaged in trade or
nonresident citizen is considered a resident citizen business (NRA-NETB) is subject to 25% income tax
for tax purposes. based on gross income from all sources within the
Philippines (ordinary income or passive income
Alien except for income subject to capital gains tax) as
- An alien is a foreign-born person who is not interest, cash and/or property dividends, rents,
qualified to acquire Philippine citizenship by birth salaries, wages, premiums, annuities,
or after birth. compensation, remuneration, emoluments, or
other fixed or determinable annual or periodic or
casual gains, profits, and capital gains.
Determine the correct classification of the taxpayer APPLICABLE INCOME TAXES AND TAX RATES
from the independent cases provided below: - Generally, there are only three (3) types of income
Case 1: tax, namely; (1) basic income tax or regular tax, (2)
Allan is a natural born Filipino citizen. His family final withholding tax (FWT) on certain passive
migrated in U.S. fifteen (15) years ago. For personal incomes, and (3) capital gains tax (CGT). The
reasons, he decided to return and reside permanently applicable taxes for individuals depend on several
in the Philippines on March 1, 2022. factors such as but not limited to:
- Answer. From Jan. to Feb. 2022: Allan is classified o Classification of the taxpayer
as NRC. o Source of income
- From March 1, 2022 onwards: Allan is classified as o Type of income
RC.
Classification of the taxpayer
Case 2:
- It is important to properly classify individual
G.I. Joe is an American information technology expert.
taxpayers because resident citizens are taxable on
He was signed by Doon Telecom, a local
their income derived from sources within and
telecommunication company, from January to March
without the Philippines while other taxpayers are
of 2022 to improve its wireless services. Due to the
taxable only on their income derived from
anticipated entry of competitors from other countries,
Philippine sources. Moreover, individual taxpayers
Doon Telecom decided to extend indefinitely the
classified as nonresident aliens not engaged in
services of G.l. Joe
trade or business (NRANETB) are taxable based on
- Answer. He is a resident alien
their "gross income" while others are taxable
- An alien who comes to the Philippines for the
based on "net income"
purpose that requires extended stay for its
accomplishment, so he makes his home
Source of Income
temporarily in the Philippines, is a resident,
- It is important to know the source of income for
regardless of his intention to return to his
tax purposes (income derived from within or
residence abroad.
without the Philippines) because as resident
Case 3: citizens are taxable based on their worldwide
Greg Popovich, head coach of the San Antonio Spurs income while others are taxable only on their
in the NBA is in the Philippines for a month-long NBA income derived from sources within the
promotional tour. He also expressed his intention to Philippines.
regularly visit the Philippines.
- Answer. Greg Popovich is classified as NRA-NETB

Case 4:
Using the same data in Case 3, assume that Greg
Popovich invested in shares of stocks of various
domestic corporations during his recent stay in the
Philippines.
- For income taxation purposes OFWs are classified
- Answer: Greg Popovich is NRA-NETB.
as nonresident citizens. Hence, income earned by
- Passive income such as dividend income is not
an OFW, as defined in RR 1-2011 that is earned
considered as income derived from trade or
out of the country is exempted from Philippine
business.
income tax. However, the earnings of an OFW
Case 5: from a business venture or any other property in
Mika "The Iceman" Immonen, a Finnish cue artist and the Philippines are subject to income tax in the
former world billiard champion is a resident of Philippines.
Finland. He won the world 9-ball championship in
2005 in the Philippines. He is also the owner of one of
the disco pubs in Malate since then.
- Answer. NRA-ETB.
- He is engaged in actual conduct of trade or
business in the Philippines but is nonresident.
Illustration Types of Income
An individual taxpayer provided the following - For income taxation purposes, the three (3) types
information for 2022: of incomes subject to income tax are as follows:
Gross business income, Philippines P5,000,000 • Ordinary or regular income
Gross business income, Canada 2,000,000 • Passive income derived from Philippine sources;
Gross business income, Singapore 1,000,000 • Capital gains subject to capital gains tax
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000 Ordinary or regular income
Business expenses, Singapore 500,000 - refers to income such as compensation income
(salaries or wages), business income, income from
practice of profession, income from sale and/or
dealings of property and miscellaneous income
and passive income other than those subject to
final taxes and capital gains tax of the Tax Code, as
amended.
- Regular incomes are subject to graduated tax
Net Income = Gross Income – Business Expense
table (also known as basic or normal tax) as
provided for under Section 24(A) of the Tax Code,
Determine the taxable income assuming:
as amended.
Case A: The taxpayer is a resident citizen
• Answer: P3,500,000
Passive incomes
Gross business income, Philippines P5,000,000
- subject to Final Withholding Taxes (FWT) are
Gross business income, Canada 2,000,000
certain passive incomes from sources within the
Gross business income, Singapore 1,000,000
Business expenses, Philippines (3,000,000) Philippines as enumerated under Sections 24(B)
Business expenses, Canada (1,000,000) and 25(A)(2) of the Tax Code, as amended.
Business expenses, Singapore (500,000) - These passive incomes are not subject to
Taxable income 3,500,000 graduated tax rate or basic tax but to specific FWT
rates.
Case B: The taxpayer is a Non-resident citizen - The Specific passive income derived from
 Answer: P2,000,000 Philippine sources that are subject to final
Gross business income, Philippines P5,000,000 withholding taxes are as follows:
Business expenses, Philippines (3,000,000) • Interest Income
Taxable income 2,000,000 • Dividend Income
• Royalties
Case C: The taxpayer is a Resident Alien • Prizes and
 Answer: P2,000,000 • Other Winnings
Gross business income, Philippines P5,000,000
Business expenses, Philippines (3,000,000) Income from sale of Capital Assets subject to capital
Taxable income 2,000,000 gains tax (CGT):
1. Capital Gains from sale of shares of stocks of a
Case D: The taxpayer is a Non-resident alien engaged domestic corporation not traded in the local stock
in trade or business exchange. (sec 24 (c) NIRC)
 Answer: P2,000,000 2. Capital Gains from sale of real property in the
Gross business income, Philippines P5,000,000 Philippines (sec 24 (d) NIRC)
Business expenses, Philippines (3,000,000)
Taxable income 2,000,000

Case E: The taxpayer is a Non-resident alien not

engaged in trade or business
 Answer: P5,000,000
I

Illustration
PURELY COMPENSATION INCOME EARNER (from Professionals
salaries or wages): - is defined as a "person formally certified by a
1) Determine the income tax due assuming the professional body belonging to a specific
"taxable compensation income" for 2023 taxable year profession by virtue of having completed a
is P240,000 required course of studies and/or practice, whose
 Answer: PO; tax exempt based on the competence can usually be measured against an
graduated tax rate established set of standards.
- It also refers to a person who engages in some art
2) Determine the income due assuming the "taxable or sport for money, as a means of livelihood,
compensation income" for 2023 taxable year is rather than as a hobby. It includes but is not
P300,000 limited to professional entertainers, professional
 Answer: P7,500 athletes, directors, producers, insurance agents,
Tax on insurance adjusters, management and technical
First P250,000 0.00 consultants, bookkeeping agents, and other
In excess of P250,000; (P50,000 x 15%) 7,500.00 recipients of professional, promotional and talent
Tax Due, 2023 7,500.00 fees"

3) Determine the income due assuming the “net Self Employed and Professionals
taxable compensation income" for 2023 taxable year - Income derived from self-employment is
is P 1,850,000.00 considered income derived from the conduct of
 Answer: P 365,000.00 trade or business, hence, classified as regular or
Tax on ordinary income.
First P800,000 102,500 - As such, it is subject to the graduated tax rate.
In excess of P800,000; (P1,050,000 x 25%) 262,500 - However, unlike compensation income or
Tax Due, 2023 365,000 salaries/wages where it is only subject to basic
tax, income derived from the conduct of trade or
business such as that of SEP is generally subject to
Self Employed and Professionals two types of taxes, the income tax (using the
Self Employed graduated tax rate) and business tax (generally
- is defined under RA10963 (TRAIN Law) as "a sole either 12% Vat or Percentage tax of 1% or 3%, as
proprietor or an independent contractor who the case may be, unless exempt under the law).
reports income earned from sole employment. - Business taxes are discussed in a separate Tax
- S/he controls who he/she works for, how the work subject "Transfer and Business Taxation"
is done and when it is done.
- It includes professionals whose income is derived
purely from the practice of profession and not
under an employer - employee relationship"
8% Preferential Tax Rate Illustration
CASE A: PURELY SEP whose gross sales/receipts and
8% Preferential Tax Rate for Self-Employed and other non-operating income does not exceed the VAT
Professionals (SEP) threshold of R3,000,000.
- Beginning 2018 or upon the effectivity of RA 1) Determine the income tax due in 2024 assuming
10963 [Tax Reform for Acceleration and Inclusion the gross sales/receipts and other non-operating
Law (TRAIN Law)], regular income of SEP income was P240,000
amounting to more than P250,000 in a taxable  Answer: PO; exempt from income tax
year but with a gross sales/receipts and other
non-operating income not exceeding the vat 2) Using the data below, determine the income tax
threshold of P3,000,000 SHALL HAVE THE OPTION due:
to avail of 8% tax on gross sales/receipts and other Gross sales P 2,800,000
non-operating income in excess of P250,000 IN Cost of sales (1,500,000)
LIEU of the graduated income tax rate and Operating expenses (750,000)
business tax under Section 116 of the Tax Code, as Net income P 550,000
amended.
 Answer: P52,500 using graduated rate
REQUISITES TO AVAIL the 8% Preferential Tax Rate Tax on
In order to avail the 8% preferential tax, the SEP shall First P400,000 income P 22,500
satisfy all the following conditions: In excess of P400,000 income 30,000
(P150,000 x 20%)
1. The gross sales/receipts and other non-operating
Income Tax Due, 2024 P 52,500
income does not exceed the vat threshold of
P3,000,000;
Note
2. The SEP shall be non-vat registered;
OPT 2024 2,800,000 x 3% = P 84,000
3. The gross sales/receipts were not derived from
vat-exempt sales and transactions;
3) Using the data below, determine the income tax
4. The SEP is not subject to Percentage Tax other
due Assume the Sep opted to avail 8% Preferential
than under Section 116 of the Tax Code, as
Tax:
amended; and
Gross sales P 2,800,000
5. The SEP signifies his/her intention to elect the 8%
Cost of sales (1,500,000)
income tax. Operating expenses (750,000)
Net income P 550,000
PURELY SEP
- An individual taxpayer is considered purely SEP if  Answer: P204,000.00 using graduated rate
s/he is not earning income from employment (2,800,000-250,000) x 8% = P204,000
(there is no income arising from employer-
employee relationship). Case B) Using the data below, determine the income
tax due
Election of 8% Preferential Tax is irrevocable during Assume the Sep opted to avail Graduated Tax Rate:
the year Gross sales P 5,000,000
- RR 8-2018 provides that unless the taxpayer Cost of sales (2,250,000)
signifies in his/her 1st Quarter return of the Operating expenses (1,250,000)
taxable year the intention to elect the 8% income Net income P 1,500,000
tax, s/he shall be considered as having availed of  Answer: P277,500.00 using graduated rate
the graduated rates under Section 24(A) of the Tax
Code, as amended, and such election shall be First P800,000 income P 102,500
irrevocable for the taxable year. In excess of P800,000 income 175,000
(P700,000 x 25%)
Income Tax Due, 2024 P 277,500

Note
VAT 5,000,000 x 12% = P 600,000
Illustration SEP’s Gross Sales/Receipts exceeded the VAT
CASE PURELY SEP using 8% tax rate but whose gross threshold during the year
sales/receipts and other non-operating income
EXCEEDs the VAT threshold of P3,000,000 during 2023 RR 8-2018 provides that, if at any time during a given
taxable year. taxable year, a taxpayer's gross sales and/or receipts
exceeded the VAT Threshold of P3,000,000.00, s/he
Pedro signified his intention to be taxed at 8% income shall automatically be subjected to the graduated
tax rate on gross sales in his 1st quarter income tax rates under Section 24(A)(2)(a) of the Tax Code, as
return. However, his gross sales during the taxable amended, with the following rules/guidelines:
year exceeded the vat threshold of P3M as provided in
his "quarterly" records as follows:  The taxpayer shall be allowed an income tax credit
of quarterly payments initially made under the 8%
income tax option.
 Taxpayer is likewise liable for business tax(es), in
addition to income tax.
 For this purpose, the taxpayer is required to
update his registration from non-vat to vat
taxpayer, within the 30 days from the close of the
Question: How much is Pedro’s Income Tax Payable in month the vat threshold was breached.
2023?  Percentage tax under Sec. 116 shall still be
imposed from the beginning of the year until
Solution taxpayer is liable to vat. The Percentage tax
 Answer: P200,500 pursuant to Section 116 of the Tax Code, as
Solution: amended, shall be imposed on the first
Sales (total for the year) 6,500,000 P3,000,000.00. The excess of the threshold shall
Cost of sales (total for the year) (3,000,000) be subject to VAT. Thus, for this purpose, vat shall
Gross Income (total for the year) 3,500,000 be imposed prospectively.
Operating expenses (total for the year) (1,440,000)  Percentage tax due on the P3,000,000.00 shall be
Net taxable income for year 2,060,000 collected without penalty, if timely paid on the
due date immediately following the month the
Income Tax Due using 2023 graduated rate threshold was breached.
First P2,000,000 P 402,500
In excess of 2M income 18,000
(P60,000 x 30%)
Income Tax Due for 2023 P 420,500

Less Quarterly Payments based

on 8% rate (3M-250k) (220,000)
Income Tax Payable P 200,500
MIXED INCOME EARNERS
- An Individual taxpayer is considered mixed income
earner if s/he is deriving income from both self
employment and compensation (arising from
employer-employee relationship).